Benjamin M. Lawsky, the New York state financial regulator, recently began an aggressive campaign against internet lenders who he claims skirt the state’s usury laws. Two Native American tribes have filed a lawsuit in New York fighting Lawsky’s campaign against their companies. The Otoe Missouria Tribe in Red Rock, Okla., and the Lac Vieux Desert Band of Lake Superior Chippewa Indians in Watersmeet, Mich., argue that their sovereign immunity permits them to do business in any state. Lawsky argues that allowing the Native American tribes to pass through New York’s laws diminishes his power to protect the state’s consumers.

Lawsky began his push in August, when he sent cease-and-desist letters to 35 different online lenders, 11 of which were affiliated with native peoples. Advocates for the native tribes argue that in order to support their members the tribes must pursue business interests outside of their reservations.

AFSA introduced a compliance training program for member companies on Sept. 4. Powered by Business Partner FIS, AFSA University will offer more than 260 courses on key federal financial services laws and regulations. The courses are web-based and teach the facts of the law/regulation with real-world examples. The content is tailored for both bank and nonbank institutions and has different modules to accommodate various job functions, including staff, management and boards of directors. AFSA University will be available to all members of the association at significant savings – the reduced fees AFSA negotiated will be passed on to the membership. The program is expected to begin operating by the end of September.

A free introductory webinar will explain how AFSA University works, the pricing scheme, and what member companies need to do to get set up in the system. The same webinar will be held twice for convenience, on Sept. 19 at 3:00 p.m. Eastern and Sept. 25 at 2:00 p.m. Eastern. In addition, compliance training – a critical component of a robust compliance management system – and AFSA University will be discussed during educational sessions at AFSA’s Annual Meeting on Oct. 22 in Washington, D.C.

For more information on AFSA University and to sign up for the webinars, contact AFSA Manager of Operations Compliance Alejandra Siles at [email protected].

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AFSA Highlights Possible Consequences of Zoning Ordinances

With growing regularity in recent years, state and local policymakers have been using zoning ordinances to limit consumers’ exposure to sources of credit they deemed risky, such as payday loans. AFSA published an issue brief explaining how these ordinances often are written so broadly that they have unintended consequences for other sources of small-dollar credit, such as traditional installment loans.

Members can access this and other issue briefs on AFSA’s website under the State Government Affairs tab.

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Inside the Beltway

More Fixes to CFPB Mortgage Rules Coming 'Any Day Now,' Cordray Says

American Banker (09/11/13) Davis, Paul

Attempting to allay bankers’ concerns, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray stated during a Sept. 11 speech that the agency would be flexible with lenders that are struggling to comply with the impending Jan. 10 deadline for new mortgage rules. "We have made these adjustments with one aim in mind: to ensure the effectiveness of our rules by making it easier for industry to comply," Cordray said. "By addressing and clarifying industry questions, we are reducing the need for individual institutions to spend time reaching their own uncertain judgments."

Cordray also addressed growing concerns that the legal safe harbor provided to banks under the Qualified Mortgage rule could still be challenged by borrowers in a court of law. "We drew bright lines to define the contours of a qualified mortgage," he said. "If those lines were not drawn as sharply as they are, then much would have remained to be fought out in the courts for years and years. So you should keep this perspective in mind if you hear people dreaming up hypothetical factual disputes in an effort to sow anxiety about potential litigation under the rule."

A new regulation by the Federal Housing Administration (FHA) is giving some mortgage analysts cause for concern. The new rule, called the “back to work” program, would permit borrowers who lost their home to foreclosure or short sale to become eligible for a new FHA loan after just one year. Previously, borrowers in a similar situation would have to wait three years before seeking another loan. Specifically, the rule applies to borrowers who lose their home because they lost their job or had a severe drop in income beyond their control. Analysts and industry players have been arguing for several months that mortgage standards are so tight that qualified borrowers are being refused funding.

Lenders have had to come up with creative ways of holding onto borrowers because all-cash buyers have taken advantage of the more restrictive credit regulations to buy up homes. Some lenders are preparing to service loans they originate and providing a fully approved purchase amount to the borrower.

However, mortgage analysts worry that relaxing the standards too much could bring the housing industry back to the bottom quickly.

A memo by Eric Cantor (R-VA), the House Majority Leader, has signaled to lawmakers and the mortgage industry that government sponsored enterprises (GSE) Fannie Mae and Freddie Mac likely will not see reform in the coming months. Cantor outlined 11 priorities, including conflict with Syria, a budget, the debt ceiling and food stamp reform for House Republicans. The absence of GSE reform makes it highly unlikely that any bill will move to final passage.

Rep. Jeb Hensarling (R-TX) has ushered his reform legislation quickly through the House Financial Services Committee, which he chairs. Getting the bill to a final vote and passage was always going to be a challenge, but with Cantor’s new list of priorities, it is unlikely that Hensarling’s bill will come to a vote. Rep. Shelly Moore Capito (R-WV), a bill cosponsor, is still hopeful that the bill can at least come to a vote on the House floor, even if it is not exactly as written. "We know and we knew when we passed it that it wasn't going to stay exactly as it was primarily written. I can accept that. I think the point is getting Fannie and Freddie wound down and to allow the private market to be able to reconstitute and to get FHA back to its original mission," Capito said. Hensarling continually has noted that House Republican leadership is very interested in GSE reform legislation.

According to several banking analysts, the Consumer Financial Protection Bureau’s (CFPB) new Qualified Mortgage (QM) rule, which is designed to protect lenders from lawsuits as long as they meet certain requirements for safe loans, is, in practice, a greater liability than banks think. On paper, the new rule would make lenders immune from lawsuits if they ensure that the loans meet certain requirements. However, in practice, lenders are forced to prove that these requirements have been met, which is difficult to do in a courtroom setting, potentially allowing borrowers to sue lenders even though their loans are considered extremely “safe.”

The problem boils down to a series of extremely complex metrics that must be met For example, a borrower could challenge the calculations made by a loan officer in regard to several factors of a loan. “We expect defaulted borrowers to challenge even so-called 'safe harbor QM loans,' typically by challenging any of the characteristics that involve calculations or judgments, including the three percent 'points and fees' limit or the calculation of the borrower's debt-to-income ratio," said Jeffrey Naimon, a partner at BuckleySandler. Naimon notes that banks are not only required to make safe loans in the first place, but are also required to hold onto significant paperwork for several years to protect against lawsuits.

If lawsuits do come about, industry analysts say it is highly likely that banks would win, but the cost of victory may be exceptionally high.

The city council of Richmond, Calif., voted 4-3 on Sept. 11 to approve the city’s plan to use eminent domain to seize underwater mortgages, despite warnings from several federal government agencies and lenders. The vote clears the way for the town to work with Mortgage Resolution Partners (MRP) to seize properties and restructure the mortgages. The company stands to make a profit on the venture with no cost to the city.

Those who voted against the proposal stated that it opens the door to serious legal liabilities as well as the risk that lenders will refuse to back mortgages in the city. The Federal Housing Agency (FHA) has instructed Fannie Mae and Freddie Mac to “severely restrict or cease” business with the city. Additionally, investors that hold portfolios with Richmond mortgages in them have sued to block the plan from going into effect.

While Americans have stepped up their borrowing in categories such as student and automobile loans, they continue to significantly reduce their use of revolving accounts, primarily in the form of credit cards, according to a new report. The Federal Reserve found that revolving account balances fell from June by a rate of 2.6 percent, which equates to nearly $1.84 billion.

Student and vehicle loans saw an increase of nearly 7.5 percent, reflecting an overall increase of just under 4.5 percent in all debt categories for the month. The sharp decrease in consumer debt, while a positive for the consumer, could signal a coming negative for the economy, as families tighten up on everyday expenditures such as trips to the mall and eating out at restaurants. The falling credit numbers, combined with a stagnant 7.3 percent unemployment rate, may signal families’ feeling financial pressure. Outstanding consumer credit peaked in the middle of 2008 at just over $1 trillion, and now stands at $850 billion.

AFSA Newsbriefs is a weekly executive summary of AFSA initiatives and consumer credit articles. AFSA Newsbriefs is free for members. Send an email to [email protected] to subscribe.

AFSA's mission is to protect and improve the consumer credit business, maintain a positive public image, and create a legislative climate in which reasonable credit regulation can and will be enacted. The association operates in the public interest, encourages and maintains ethical business practices, supports financial education for consumers of all ages, and provides other assistance in related fields on an as-needed basis.

The American Financial Services Association has provided services to its members for over ninety years. The association's officers, board, and staff are dedicated to continuing this impressive legacy of commitment through the addition of new members and programs, and increasing the quality of existing services.